Markets: A pivotal week for global monetary policy - Westpac

According to Elliot Clarke, Research Analyst at Westpac, the past week has been pivotal for global monetary policy, with both the FOMC and ECB meeting.

Key Quotes

“Broadly, the FOMC franked market expectations by: raising the fed funds rate by 25bps for a second time in 2018; remaining optimistic over economic activity in 2018 and 2019; but cautious on inflation prospects. Together with the activity and inflation forecasts, the median 2018 rates expectation of the Committee shifting from 3 to 4 hikes (as one member altered their forecast) is best construed as evidence that risks are tilting to the upside not that four hikes have been locked in.”

“We continue to forecast a third 2018 hike in September and view a follow-up (fourth hike) in December as a risk if the 10-year yield fails to rise materially above 3.00%. A further two hikes are factored into our forecasts in 2019, taking the fed funds rate to 2.625% (if a fourth hike in 2018 does not occur). As we see neutral as 2.5%, in tandem with a stronger US dollar and the end of increased government spending, this is likely to be enough to cause a material slowdown in growth in late 2018, putting a halt to the FOMC’s hiking cycle come June 2019. The FOMC instead believe neutral to be higher, circa 2.9%, and so expect to be hiking into 2020.”

“From the ECB, we received two significant announcements: the ceasing of net asset purchases at December 2018 after at 3-month extension at €15bn per month; and a commitment to keep key ECB rates unchanged through northern summer 2019. The latter was most significant for the markets, highlighting downside risks to the outlook and the difficulty that the ECB continues to have in stoking core inflation towards target. The net result on markets of these two meetings is a stronger US dollar (at the expense of the Euro) and lower market rates across the curve in Europe.”